Hopes high for bridging differences at Pittsburgh summit

As the G20 summit opens in the US city of Pittsburgh, Pennsylvania, world leaders face significant hurdles on their way to a consensus on how to fix the global economy and ensure it can weather the financial storms of the future.

As G20 leaders meet in Pittsburgh for the latest in a series of summits aimed at rebooting the global economy, the focus has shifted from combating the worst financial crisis since the Great Depression to preventing it from ever happening again. But although world leaders agree that better regulation and a new culture of responsibility are called for, just how to realise such changes remains a hot topic for debate.

Britain, France and Germany on Wednesday unveiled plans to create three supra-European authorities charged with regulating Europe’s banks, insurance companies and stock markets. In addition, a new organisation charged with assessing systemic financial hazards would operate under the auspices of the European Central Bank (ECB). Significantly, the new agencies will be able to resolve disputes between national regulators.

“Our aim is to protect European taxpayers from a repeat of the dark days of autumn 2008, when governments had to pour billions of euros into the banks,” European Commission President Jose Manuel Barroso said in a statement on Wednesday. Barroso added that he hoped the new mechanisms, to be known as the European Securities and Markets Authority and the European Systemic Risk Board, would inspire the creation of global regulatory bodies.

Watching the watchdogs

But disagreements have already arisen among Europeans over how much power these new uber-authorities should have. The French fear that the new regulators will not be able to move quickly enough to avoid crises unless they have the power to act independently of national governments – a proposal that the European Commission rejects. British Prime Minister Gordon Brown also wants to ensure that the new overseers will not have the power to override national watchdogs and would only step in when a government requests it.

German Finance Minister Peer Steinbrueck lashed out at the British position, accusing London of undermining moves to introduce parity in financial policy. “There is clearly a lobby in London that wants to defend its competitive advantage tooth and nail,” Steinbrueck told Stern magazine in an interview released on Wednesday.

In contrast with the European approach, US President Barack Obama is expected to propose making existing laws and regulations more effective while boosting international cooperation rather than on creating new mechanisms for supervising policy.

Obama will also call on net exporters – including Germany, China and Japan – to boost consumption while urging debtor nations like the United States to save more, according to a policy paper obtained by Reuters ahead of the summit.

The bonus question

A major point of contention remains how to tackle the excesses of big-bonus culture. A summit of G20 finance ministers in London on September 5 failed to find consensus between those nations pushing for bonus caps, led by France and Germany, and those who fear strict limits will undermine economic growth and drive financial giants elsewhere. Britain, the United States and Canada, which oppose absolute caps, settled on something of a compromise in London by agreeing to link bonus pay more directly to performance and financial risk.

A Dutch proposal to limit bonuses in accordance with executives’ fixed annual salaries is also gaining traction. Germany’s Steinbrueck says he supports the Dutch proposal but that the details will need to be hammered out in Pittsburgh.

“It's up to the G20 summit to agree on the balance between fixed and variable compensation,” he said in an interview with German daily Sueddeutsche Zeitung.

But Steinbrueck remains optimistic. “I think there’s interest in reaching a deal on both sides of the Atlantic when it comes to tightening bank bonuses and raising capital requirements for banks,” he told Handelsblatt, a German business publication. Obama called in London for banks to raise more capital so governments would not have to bail them out in the future.

Given the many devils that still lurk among the details, the G20 Pittsburgh meeting remains at risk of becoming an exercise in shrill calls for progress but, ultimately, diplomatic compromise leading to inaction.

G20 finance ministers and central bank heads are scheduled to convene in Scotland on November 7-8, so Pittsburgh will not be the last chance for economic reform. Perhaps the finance chiefs will see a way forward even if the politicians fail.